Broker Wins Lawsuit over Escrow Retention

A Massachusetts court has considered whether a broker properly retained a share of the escrowed funds when transaction failed to close.

Lee Kupperstein died, leaving her three children (Joel, Robert, and Gordon) to divide her estate (“Estate”).  All three children were co-executors of the estate.

One item in the Estate was a condominium that she owned. The Estate listed the condominium for sale with Susan Baum (“Broker”) of Berkshire Homes and Condos (“Brokerage”). The listing agreement contained a clause which stated that if a buyer defaulted on the purchase contract and forfeited the earnest money held in escrow by the Broker, then the “Broker shall be entitled to retain up one-half (1/2) of the Seller’s retained damages, up to an amount not exceeding the full brokerage fee due, in payment of services, advertising, and other expenses.” 

The initial listing was extended for a year, and then extended again for another six months with a drop in the listing price. None of the extensions were made in writing, but rather were verbal authorizations. In May 2008, the Broker secured an offer for the property. The potential buyer made an earnest money deposit of $16,500, or 10% of the purchase price, with the money held in the Broker’s escrow account.

The buyer defaulted on the purchase agreement and so forfeited half of the earnest money deposit. After refunding the buyer’s portion of the earnest money, the Broker retained $4,125 (half of the forfeited earnest money), based on the language in the listing agreement. One of the co-executors demanded that the Broker turn over the $4,125 to the Estate but she refused. The Estate eventually filed a small claims action seeking the remainder of the earnest money from the Broker. The small claims court ruled in favor of the Estate, and the Broker appealed.

The Commonwealth of Massachusetts, District Court Department, Concord Division, reversed the lower court.  First, the court considered whether the original listing agreement had been extended. Despite the fact that the extensions were not in writing, the court ruled that the evidence showed that the listing agreement had been extended by the Estate. The Estate never took back the keys from the Broker or provided any notice of cancellation, and one of the trustees had signed a disclosure form acknowledging that the Broker was the Estate’s representative in the transaction.

Next, the court considered the conversion claims brought against the Broker. Massachusetts has a two-year statute of limitations for tort claims. Since this lawsuit was filed more than two years after the Estate demanded that the Broker return the portion of the earnest money, the court affirmed the dismissal of these allegations.

Finally, the court examined the breach of contract allegations brought by the Estate. Contrary to the small claims court findings, the district court judge ruled that the listing agreement had been extended by the parties. Therefore, the language in the listing agreement entitled the Broker to retain half of the forfeited earnest money. In addition, the court also ruled that the Estate had violated the covenant of good faith implied in every contract by utilizing the services of the Broker to find a buyer but then later claiming that the Broker actually did not represent them because the listing agreement had not been extended in writing. Based on those findings, the court dismissed the lawsuit and ruled that the Broker could retain the remaining forfeited earnest money.

Estate of Kupperstein v. Baum, No. 1147SC0518 (Mass. Dist. Ct. March 5, 2013).  [Note: This opinion is not published in an official reporter and therefore should not be cited as authority. Please consult counsel before relying on this opinion.]

Editor’s Note: NAR Legal Affairs would like to thank Sandy Carroll, CEO of the Berkshire County Board of REALTORS®, for sending us this decision.